Executive compensation: a calibration approach

Summary. We use a version of the Grossman and Hart principal-agent model with 10 actions and 10 states to produce quantitative predictions for executive compensation. Performance incentives derived from the model are compared with the performance incentives of 350 firms chosen from a survey by Michael Jensen and Kevin Murphy. The results suggest both that the model does a reasonable job of explaining the data and that actual incentives are close to the optimal incentives predicted by theory. Received: August 12, 1997; revised version: October 27, 1997     

Preparing Russian Small Innovative Enterprises for International Competitiveness: A Scoping Study

Russian small innovative enterprises (SIEs) are emerging as an important force behind the restructuring of the Russian economy and its industrial and commercial infrastructure. The research presented in this paper suggests that there are at least three categories of factors that impact the move of Russian SIEs into international markets: (i) macro-economic obstacles (ii) lacking managerial and business competencies and (iii) differences in culture and business practices. The first factor cannot be directly influenced by the individual SIE, while the latter two represent opportunities of a developmental nature. The work of this paper purports to lay the groundwork for more theoretical follow-up analyses.     

A comparative study of the probability of default for global financial firms

This article presents a modification of Merton’s (1976) ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the US and focus on the subprime mortgage crisis period. We compare the performance of the implied probability of default from our model to the expected default frequencies based on the Moody’s KMV model and agency credit ratings by constructing cumulative accuracy profiles (CAP) and the receiver operating characteristic (ROC). We find that the probability of default estimates from our model are equal or superior to other credit risk measures studied based on CAP and ROC. In particular, during the subprime crisis our model surpassed credit ratings and matched or exceeded KMV in anticipating the magnitude of the crisis. We have also found some initial evidence that adding off-balance-sheet derivatives exposure improves the performance of the KMV model.     

Modeling and forecasting of Brazilian reservoir inflows via dynamic linear models

This work focuses on developing a forecasting model for the water inflow at an hydroelectric plant’s reservoir for operations planning. The planning horizon is 5 years in monthly steps. Due to the complex behavior of the monthly inflow time series we use a Bayesian dynamic linear model that incorporates seasonal and autoregressive components. We also use climate variables like monthly precipitation, El Niño and other indices as predictor variables when relevant. The Brazilian power system has 140 hydroelectric plants. Based on geographical considerations, these plants are collated by basin and classified into 15 groups that correspond to the major river basins, in order to reduce the dimension of the problem. The model is then tested for these 15 groups. Each group will have a different forecasting model that can best describe its unique seasonality and characteristics. The results show that the forecasting approach taken in this paper produces substantially better predictions than the current model adopted in Brazil (see Maceira & Damazio, 2006), leading to superior operations planning.     

A critical review of primary health care reform in Bulgaria: impact on consumers

The Health Care System in Bulgaria is in a period of transition and is undergoing profound changes in financing, organization and ownership. A priority of this reform is to shift the focus of healthcare to the primary sector and to emphasize general practice. New legislation in support of this health care reform has been passed over the last few years. However, this legislation, although consistent with the global aims to be achieved, has proven to be contradictory in terms of its practical implementation. This has had a negative impact on health care consumers’ interests and rights. This paper evaluates the effects of primary health care reform in Bulgaria from the perspective of patient satisfaction. For this purpose, a major task to be fulfilled is to identify the contradictions emerging between the legislation outlining the reforms and the realities of practical implementation with respect to its impact on consumers. The methods applied include: a review of the legislation, a review of the practical progression of the reform process, and an assessment of the new developments in health care consumers’ interests and rights. Considerable contradictions have been found between the legal framework of health care reform in primary care and existing experiences, traditions and expectations. The legislation is inconsistent with the existing realities of healthcare provision. This is leading to turmoil in the health care system during its present transformation and is infringing upon consumers’ rights. Problems emerging in the process of reform need to be identified, and solutions need to be found and worked out as the reforms progress. An assessment system has to be developed to monitor the overall reform process and to evaluate the effectiveness and efficiency of the changes introduced. The impact on consumer and patient satisfaction should be an area of prime concern during these assessments.     

On the choice of measures of reliability and validity in the content-analysis of texts

The paper discusses several reliability measures: Scott’s pi, Krippendorff’s alpha, free marginal adjustment (Bennett, Alpert and Goldstein’s \(S\) ), Cohen’s kappa, and Perreault and Leigh’s \(I\) and the assumptions on which they are based. It is suggested that correlation coefficients between, on one hand, the distribution of qualitative codes and, on the other hand, word co-occurrences and the distribution of the categories identified with the help of the dictionary based on substitution complement the other reliability measures. The paper shows that the choice of the reliability measure depends on the format of the text (stylistic versus rhetorical) and the type of reading (comprehension versus interpretation). Namely, Cohen’s kappa and Bennett, Alpert and Goldstein’s \(S\) emerge as reliability measures particularly suited for perspectival reading of rhetorical texts. Outcomes of the content analysis of 57 texts performed by four coders with the help of computer program QDA Miner inform the analysis.     

Can religion insure against aggregate shocks to happiness? The case of transition countries

This paper examines the effects of reforms and religion on happiness in transition economies. Earlier literature suggests that religiosity insures happiness against various individual stressful life events. This phenomenon is well-explored in developed countries but rarely studied in post-communist countries, where religion was officially suppressed for a long period. These countries have undergone considerable economic transformations over the past two decades. Using cross-sectional Life in Transition Survey data and historical data on religions, I examine if religion insures against economic reforms. The endogeneity of religion is taken into account. The findings suggest that economic reforms may have both positive and negative effects on happiness. Religiosity indeed insures happiness and perceptions of economic and political situations against economic reforms.     

Prioritizing Project Selection

We consider capital investments under uncertainty. A typical approach to this problem, when the problem parameters are assumed known, is via a multi-knapsack model. This model takes as input annual budgets as well as the cost streams and profit—i.e., net present value (NPV)—of each project. Its output is a portfolio of projects with the highest total NPV, observing yearly budget constraints. We argue that such a portfolio fails to hedge against uncertainties in the budgets, the cost streams, and the profits. As an alternative, we propose a model that forms an optimal priority list of projects, incorporating multiple scenarios for these input parameters. We apply our approach to two sets of example projects from the South Texas Project Nuclear Operating Company.     

In Support of Public or Private Interests? An Examination of Sanctions Imposed Under the AICPA Code of Professional Conduct

The American Institute of Certified Public Accountants (AICPA) monitors the misconduct of its members using the AICPA Code of Professional Conduct (CPC). To accomplish this task, the AICPA relies on various stakeholders to report known violations of its CPC. We examine the full population of sanctions imposed by the AICPA on its members under its CPC from 2008–2013 to identify recent trends in the misconduct of accounting professionals. While we find that multiple stakeholders identify and report violations, we also find that the most common types of violations remain consistent with those reported in the 1990s. Further, we develop a taxonomy based on prior accounting literature to determine whether the AICPA CPC is being enforced to defend the public interest and/or the private interests of the accounting profession. In contrast to prior studies, our results suggest that as the accounting profession emerges from a recession and period of intense public scrutiny, the AICPA CPC is largely being enforced to defend the public interest. This public interest focus was most pronounced during the recessionary years of 2008–2010, as evident from misconduct reported by parties such as the Internal Revenue Service, Securities and Exchange Commission, Public Company Accounting Oversight Board, and state boards of accountancy. Although key stakeholders have recently focused on reporting misconduct that threatens the public interest, we believe there are still areas in need of improvement, especially around the level of detail provided in the AICPA’s sanction records. We propose some possible solutions to improve public transparency.